New Debt Mutual Funds Taxation Rules from 1-Apr-2023

Govt of India has amended finance bill 2023 now and made changes on debt mutual funds taxation which is effective from 1^st April, 2023. Earlier debt funds used to get indexation benefits which would be lost with this move. What are the new debt mutual funds taxation rules from Apr-2023? Would these rules affect the capital gains from existing debt mutual funds?

Also Read: 5 Equity funds with high returns in last 1 year

New Taxation rules for Debt Mutual Funds from 1-Apr-2023

Let us classify the mutual funds for better understanding in 3 buckets i.e. funds that invest in equity above 65%, 65% to 35% and < 35%.

> 65% of equity exposure – No change in mutual fund taxation rules

65% to 35% of equity exposure – No change in mutual funds taxation

< 35% of equity exposure – This is big change here. Any mutual fund which invests for less than 35% in equity is classified under non equity mutual fund and no indexation benefits available here with the new change. For all long term capital gains (LTCG) or short term capital gains (STCG), investors need to pay income tax based on the income tax slab applicable to them.

Would this new rule affect existing mutual funds?

These new taxation rules are effective from 1^st April, 2023. Means any fresh investment in debt mutual funds after this date, new taxation rules would apply.

Some mutual funds purchased before 1^st April, 2023 should be ideally grandfathered i.e. The capital gains would be taxed as per old method.

Would this new rule affect only debt mutual funds?

Beyond the debt mutual funds, this change would also affect returns from gold mutual funds and international mutual funds since these mutual funds also would fall into < 35% equity exposure bucket.

Also Read: 5 Debt mutual funds with highest SIP Returns in last 10 years

Should you stop investing in new debt funds now?

While it is surprise move from Govt of India, till this new taxation rule is passed in parliament, one should not conclude anything on this.

Also, AMC / mutual fund houses need to align existing mutual funds or new mutual funds to this rule so that it is easy for investors to understand tax implications.

In some cases AMC or mutual fund houses might increase arbitrage exposure to 35% and above in a mutual fund scheme so that it would fall in equity mutual funds segment which would continue to benefit indexation benefits.  Till such time, investors can hold making any fresh investments into the debt mutual funds.

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Suresh KP is the Founder of Myinvestmentideas. He is NISM Certified – Investment Adviser and NISM Certified – Research Analyst. He has been analyzing financial markets in the last 20 years.He can be reached at suresh@myinvestmentideas.com

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